Turkey: The New Draft Electricity Market Law

More than eleven years have passed since the Electricity Market Law numbered 46281 (the "EML") was enacted with the purpose of establishing a financially strong energy market, operating subject to private law provisions in a competitive environment, and securing the supply of sufficient, safe, uninterrupted, economical, environmentally friendly, and high-quality electrical energy. Being amended various times, the EML has successfully managed to realize most of the legal and structural changes that it was intended to accomplish. Now that transparent market mechanisms have been established by the Energy Market Regulatory Authority (the "EMRA"), there are a significant number of investors active in the electricity market, and if all of the ongoing investments are completed within the determined construction periods, Turkey will have no fear of demand surpassing supply in the short run.

Nevertheless, there is still a long road ahead towards reducing market risks, completing the privatization process, and having a fully competitive market interconnected to Europe and the Middle East. Hence, by taking into consideration the current market dynamics and needs, the Ministry of Energy and Natural Resources (the "MENR") has prepared a new electricity market law draft (the "Draft EML"), which, if adopted, would revoke the EML. However, there is no official information as to when it will be placed on Parliament's agenda.

In order to achieve the outstanding goals of the EML, the Draft EML introduces various novelties, some of which are discussed below:

  • Organized Electricity Wholesale Markets: The Draft EML introduces the concept of organized wholesale electricity markets (organize toptan elektrik piyasaları) that are defined as markets where the wholesale and retail sales of electrical energy, electrical capacity and by-products of such is transacted, and which are organized and operated by intermediary legal entities holding market operating licenses. Examples of these markets are the day-ahead market, intra-day market, power balancing market, ancillary services market, over-the-counter markets, derivatives market, power balancing market, and ancillary services market that is organized and operated by TEİAS2.

    It is stated under the Draft EML that a new corporation named EPIAS3 will be established to conduct market operating activities under a market operating license. Market operating activity is defined as the operation of organized wholesale electricity markets and financial settlement operations to be carried out in relation to the activities that are conducted in such markets. According to the Draft EML, EPIAS, among others:

    - will perform studies for the establishment of new markets in organized wholesale electricity markets in line with market progress and submit such studies to the EMRA;
    - will determine and submit to the EMRA market operating tariffs in accordance with the principles and procedures to be determined by the EMRA;
    - if deemed necessary by the EMRA, will perform studies regarding the establishment of organized wholesale markets for energy markets other than electricity markets and, if authorized to do so by the EMRA and/or other relevant authorities, will operate such markets; and
    - will conduct the financial settlement operations of organized wholesale markets operated by TEIAS.

    Since the government has promised to have a properly established and smooth-working energy exchange within 2015, it is expected that following the adoption of the Draft EML, secondary legislation regarding the EPIAS will be issued as soon as possible, and that the EPIAS will start operating as an exchange, initially for the electricity market, and subsequently will cover other markets, such as natural gas, oil and carbon.

    The MENR is currently working on a strategy paper addressing issues such as the model of the energy exchange, and the roadmap for the establishment of spot and derivatives markets. There are two main issues that are still under discussion: (i) whether the energy exchange should be formed under the IMKB, or whether it should be an independent entity; and (ii) who will be the shareholders of the EPIAS.
  • Share Transfer: Under the EML, license holders must obtain the EMRA board's approval in cases where there will be an ownership change of 10% or more in their issued share capital (5% or more for publicly traded companies) or merger of such license-holding companies, or in the event of a change of control, the sale, transfer or other arrangements that will result in the change of the structure of such license-holding companies. If the Draft EML is adopted, only the license-holding companies whose tariffs are subject to regulation (tarifesi düzenlemeye bağlı lisans sahibi tüzel kişiler) will have to obtain the EMRA board's approval for issued share capital ownership changes. The EMRA's approval will not be needed for changes in the shareholding structure of license holders, other than those whose tariffs are subject to regulation.
  • Pre-license: If the Draft EML is adopted, before obtaining an electricity generation license, applicants will have to first obtain a pre-license for each facility, during the term of which they should obtain the required licenses, permits and approvals without which they will be unable to commence generation facility investments.

    Electricity generation license applications made, but not concluded prior to the entry into force of the Draft EML, will be deemed to be pre-license applications.

The term of a pre-license cannot be longer than 24 months, regardless of whether a force majeure event has occurred. The EMRA board may extend such period up to a maximum of 12 months by taking into account the resource and the installed capacity applied for. Electricity generation licenses will not be granted to legal entities that cannot obtain the relevant licenses, permits and/or approvals, or cannot obtain the ownership of, or usufruct rights to, the relevant land, or cannot fulfill other requirements to be determined by the EMRA. We believe that the pre-license period under the Draft EML may need to be reconsidered in light of the Council of State's final decision regarding the immediate expropriation process4.

In addition to the above, pre-licenses will automatically become null and void if the shareholding structure of the pre-license holder company changes, either directly or indirectly (except for succession and bankruptcy), and/or its shares are transferred, or if the transactions that lead to the transfer of shares are conducted, or the requirements determined by the EMRA are not fulfilled. In such cases, the pre-license holder company, its shareholders holding more than 10% of its shares (5% if the company is publicly traded), as well as the companies in which such persons/legal entities are a shareholder, will not be allowed to apply for a pre-license for the same area for one year following the nullification of such pre-license. If the pre-license is rendered null due to a force majeure event, this kind of a market prohibition will not be applied.

The EMRA will adopt secondary legislation further detailing the principles and procedures regarding pre-license applications, application assessments, pre-license amendments, terminations, cancellations, extensions and share capital requirements for pre-license holder companies.

  • Electricity Market Licenses: The current system regulating which market activity can be conducted under which license will change with the Draft EML. Auto producers, auto producer groups, and wholesale and retail sale licenses will not be issued any longer, and those that exist will be replaced with generation and supply licenses.

    A supply license, a new type of license introduced with the Draft EML, will entitle its holder to engage in wholesale and retail sales, and import and export of electricity and/or capacity within Turkey, without being subject to any regional limitation. Supply licenses will be granted ex officio to existing wholesale and retail sale license-holders, without prejudice to their existing rights, and without claiming any license fee, until 31 December 2012. In addition, distribution license-holders will be obliged to obtain a supplier license before 31 December 2012 in order to supply electricity to non-eligible consumers within their license areas, and to act as a last resource supplier (son kaynak tedarikçisi). Last resource supply is also a new concept introduced by the Draft EML, and is defined as the supply of electricity to eligible consumers who cannot procure electricity from any other supplier, but the distribution license-holder company that is authorized as the last-resource supplier.

    Under the EML, legal entities generating electricity mainly to satisfy their own electricity needs must obtain an auto producing license, and legal entities generating electricity mainly to satisfy the electricity needs of their shareholders must obtain an auto producing group license. If the Draft EML is adopted, it will not be possible to make new auto producing or auto producing group license applications to the EMRA, and electricity generation licenses will be granted ex officio to existing auto producing and auto producing group license-holders, without prejudice to their existing rights, and without claiming any license fee, until 31 December 2012.
  • Conduct of Import/Export Activities: Under the EML, electricity import activities can be conducted by Turkish Electricity Trade and Contracting Corporation ("TETAS"), private sector wholesale and/or retail sale license-holding companies, and distribution license-holding companies that also hold retail sale licenses, while export activities can be conducted by TETAS and companies holding wholesale licenses. If the Draft EML is adopted, importation of electricity and/or capacity can be conducted by TETAS, as well as supply license-holding companies, while exportation of electricity and/or capacity can be conducted by TETAS, supply license-holding companies and, in a point of difference from the EML, by generation license-holding companies.
  • Additional Requirements to License Holding Companies: From the wording of the Draft EML, it is clear that there will be a number of additional requirements imposed on license-holding companies. For example, it is stated under the Draft EML that (i) license-holding companies whose tariffs are subject to regulation will be required to have one independent member on their board of directors; (ii) the assignment of the rights of license-holding companies whose tariffs are subject to regulation will be subject to certain rules; (iii) distribution license-holding companies will be required to employ a number of qualified personnel, and (iv) if distribution license-holding companies do not provide the services and/or make the investments described in their tariffs, the cash cover (mali karşılık) of such services/investments will be collected first from the revenues that such company generates through its other activities and, in cases where those revenues do not suffice to match that cash cover, from the dividend incomes of the existing shareholders of such company, and in cases where that amount still does not suffice, from the assets of such company's shareholders. It is further stated that the details of all such requirements and/or procedures will be regulated in detail under the regulations to be issued following the entry into force of the Draft EML.
  • Compliance with the Construction Period: The Draft EML has stricter provisions compared to the EML with respect to compliance with construction periods. Under the Draft EML, the EMRA will be allowed to preemptively cancel a generation license if it becomes clear that the construction of the facility in question cannot be completed within the construction period, in addition to being able to revoke a license after the construction period expires, and before the facility is completed. With the pre-license procedure, the bases on which a license-holding company may apply for a construction period extension are automatically limited, and, with the addition of the sanction of the cancellation of the license without having to wait for the end of the construction period, license-holding companies will be precluded from applying for a time extension at the very end of the construction period. As a result of these facts, we believe that the mechanisms of construction contracts and the choice of contractors will gain greater importance.

    The Draft Law further states that if current license-holders whose pre-construction periods have not yet expired, and/or license-holders whose pre-construction periods as determined under their licenses have expired, but who have not been able to fulfill their obligations completely during this period, apply to the EMRA within one month following the entry into force of the Draft Law, their licenses will be terminated, and they will be granted pre-licenses for a term equal to their remaining pre-construction periods, plus three months, or, if there was no pre-construction period remaining, for a three-month term. As for existing license-holders whose pre-construction periods have not expired as of the date the Draft Law is entered into force, and who have not applied to the EMRA as explained above, the licenses of such companies which cannot fulfill their pre-construction period obligations within the determined pre-construction period will be cancelled, and the collaterals that they have submitted in order to obtain such license will be registered as revenue.
  • Compliance with Environmental Laws: Under the EML, successful bidders of privatization tenders will have two years following the completion of the transactions required for the transfer of operating rights of the relevant facility in which to render such facility compliant with environmental legislation. According to the Draft EML, the EUAS5 and/or its affiliates, subsidiaries, business organizations and assets, and public companies to be established in accordance with Law No: 40466, must complete their investments in order to be compliant with the environmental legislation, and must obtain the relevant environmental licenses/permits by 31 December 2018. This obligation will remain valid and binding on them even if such entities are privatized, and their activities will not be suspended, nor will any administrative fines be imposed on them before the end of the given period for their ongoing and past activities.

The Draft EML only forms the framework of the new system to be shaped by the novelties introduced. The interpretation and implementation of such novelties, and the mechanics of the new system, will mostly depend on the secondary legislation to be issued by the relevant governmental authorities, including the EMRA and MENR, following the adoption of the Draft EML. Considering the number of regulations proposed to be issued under the Draft EML (around thirty), and the fact that there is no explicit provision as to when all these regulations will be issued, it is not inappropriate to say that change within the Turkish electricity market is just beginning.

Footnotes

1 Published in the Official Gazette dated 3 March 2001, numbered 24335.

2 Turkish Electricity Transmission Corporation.

3 Energy Markets Operating Corporation.

4 The Council of Ministers decision dated 14 September 2004 and numbered 2004/7892, assigning the Council of Ministers' immediate expropriation right to the EMRA, is currently under judicial review.

5 The Electricity Generation Corporation.

6 Published in the Official Gazette dated 27 November 1994, numbered 22124.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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